By Steve Cordasco — 11/4/2016
Everyone is talking about Hillary Clinton’s proposal to increase the estate tax to 65 percent.
This is no surprise–– the estate tax is a popular topic during every election year, and 2016 is no different. Opinions on the tax itself are divided and varied. But how significant is the issue of estate tax increases? And how much will it actually help?
I recently dove into this topic in one of my Your Life, Your Wealth podcasts. Evan Powers of SeekingAlpha joined the show and shared his thoughts. “The simple fact of the matter is that the estate tax is a really minor thing when it comes down to it,” he said. “In terms of revenue sources, and in terms of its actual impact on Americans and voters.”
This number is great for headlines, but the actual impact is pretty small. Given the fact that this attention-grabbing 65 percent impacts only estates valued in excess of $1 billion for married couples, this is something that most Americans won’t ever have to deal with. “The most recent data we have is from 2013,” Powers explained, “and in 2013 there were about 2.5 million Americans who passed away and fewer than five thousand of them actually ended up owing any estate tax.”
Increasing the rate from 40 to 65 percent wouldn’t do much to impact the average American. Because of this, Clinton’s proposal seems to be about throwing Sanders supporters some red meat, more than materially impacting revenue.
“An increase on the estate tax is maybe a little less progressive than it seems on the surface,” Evan said, adding: “There are currently only about 500 billionaires in the US. How many of those do you think will die without doing some proper estate and charitable planning?”
On that point, he is correct. The people in the top earning brackets aren’t going into financial planning unprepared; they have the resources and a team of lawyers to help them get the most out of their money and avoid paying unnecessary taxes.
What’s much scarier is Clinton’s previous support of reducing the exemption to $3.5 million. At that level, we really start to hurt successful small business people that might not have the time, aptitude or social connections to get the planning done in time to avoid being bound to the tax.
Higher rates and lower exemption amounts will certainly raise revenue, but does the estate tax ever really move the needle? In 1990, when there were much lower exemptions, the estate and gift tax accounted for about 1 percent of Federal Revenue. In 2014, it was about 0.6 percent of Federal Revenue.
These numbers prove that Clinton’s stance on estate tax is more about creating a class war and winning votes, not about creating revenue.
The ironic part of the estate tax conversation is that it sounds great to the angry millennials who hate the upper 1 percent. This crowd is mostly made up of the Bernie Sanders supporters that Hillary is attempting to win over. The typical one-percenters that these young people are rallying against aren’t going to be affected in the way voters are hoping for; they are the ones with the resources available to avoid or significantly mitigate the tax.
Who does the burden really fall on, then? Small business owners who have worked hard for everything they have.
An increase in the estate tax will likely fall on the shoulders of the wealthy, yes–– but not the ultra, ultra-wealthy. Unfortunately, it is really the people that did not grow up “privileged” that will be hurt. Most of all, the consequences will push back against the all-American small business owner that we are supposed to admire, the person who built a business from the ground up and who Hillary Clinton claims to be fighting for.
When someone pours their heart and soul into a business for years and finally reaches the level of success that they’ve been working for, most of their time and energy is spent trying to maintain that business and keeping it afloat, not worrying about loopholes in the estate tax.
These are the real victims of lowering the estate tax exemption, and we’re going to see them affected in droves. The Philadelphia landscape is bound to change no matter who ends up in the Oval Office next–– but it shouldn’t be at the cost of the people who worked to build it into one of the top cities to live and work in.
Steve Cordasco is CEO of Cordasco Financial Network, an independent financial services firm.